Monday, April 18, 2016

Some Economics for Tax Filing Day

U.S. tax returns and taxes owed for 2015 are due today, April 18. To commemorate, I offer some connections to five posts about taxes from the last few years. Click on the links if you'd like additional discussion and sources for of any of these topics.

1) Should Individual Income Tax Returns be Public Information? (March 30, 2015)
"My guess is that if you asked Americans if their income taxes should be public information, the answers would mostly run the spectrum from "absolutely not" to "hell, no." But the idea that tax returns should be confidential and not subject to disclosure was not a specific part of US law until 1976. At earlier periods of US history, tax returns were sometimes published in newspapers or posted in public places. Today, Sweden, Finland, Iceland and Norway have at least some disclosure of tax returns--and since 2001 in Norway, you can obtain information on income and taxes paid through public records available online."
2) Could government just fill out preliminary and placeholder tax returns for everyone?

For most people, the US government already has access to your income earned at work, through records from your employer, and it has access to the pathetic little slice of interest you are earning on your bank account. Your age, and the ages of your family members, advance predictably from year to year. For those who don't itemize deductions on their tax returns, which is about 70% of all tax returns, this is all the information needed to fill out your taxes. So why doesn't the US government fill in this information, calculate taxes owed or refund to be received, and send it to you? You could just accept what they sent, or you could file as usual and make any needed corrections. I discuss how this is done in Denmark, where about 80% of taxpayers accept the accuracy of the form the government sends them, and I also discuss the hurdles faced by proposals to do this in the United States, in "When Government Pre-Fills Income Tax Returns" (April 15, 2014).

3) What is the average share of income paid in federal taxes by people from different income groups? 

However much and in whatever direction your knee-jerk reflexes twitch when the subject of income distribution arises, it's useful to start with a grounding of "Facts on the US Income Distribution, Before and After Taxes" (November 14, 2014). The Congressional Budget Office lays out many of the key facts in a November 2014 report: "The Distribution of Household Income and Federal Taxes, 2011."  As one example among several discussed at the post and in the report, here's the path of average taxes paid as a share of income over time that includes all federal taxes: that is, federal income taxes, payroll taxes, corporate income taxes (attributed back to individuals). and excise taxes. The division here is top 1%, 81st-99th percentile, middle three quintiles (that is, middle three-fifths), and bottom quintile. Again, these are average tax rates. Thus, a person at the very top of the income distribution might well be paying a tax rate on the marginal dollar of market income received of 40% or more, but the average tax rate for that same person over all income received could well by the 29% shown for 2011 in the figure.

4) The top marginal income tax rates used to be a lot higher, but what share of taxpayers actually faced those high rates,, and much revenue did those higher rates actually collect?

Compare "Top Marginal Tax Rates: 1958 vs. 2009" (March 16, 2012), which is based on a short report by Daniel Baneman and Jim Nunns,"Income Tax Paid at Each Tax Rate, 1958-2009," published by the Tax Policy Center. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%. What share of taxpayer returns paid these high rates? Across this time period, roughly 20% of all tax returns owed no tax, and so faced a marginal tax rate of zero percent. Back in 1958, the most common marginal tax brackets faced by taxpayers were in the 16-28% category; since the mid-1980s, the most common marginal tax rate faced by taxpayers has been the 1-16% category. Clearly, a very small proportion of taxpayers actually faced the very highest marginal tax rates.

How much revenue was raised by the highest marginal tax rates? Although the highest marginal tax rates applied to a tiny share of taxpayers, marginal tax rates above 39.7% collected more than 10% of income tax revenue back in the late 1950s. It's interesting to note that the share of income tax revenue collected by those in the top brackets for 2009--that is, the 29-35% category, is larger than the rate collected by all marginal tax brackets above 29% back in the 1960s.

5) Did you know "How Milton Friedman Helped to Invent Tax Withholding" (April 12, 2014)?

The great economist Milton Friedman--known for his pro-market, limited government views--helped to invent government withholding of income tax. It happened early in his career, when he was working for the U.S. government during World War II, and the top priority was to raise government revenues to support the war effort. Of course, the IRS opposed the idea at the time as impractical.